In the last year, Québec’s Financial Markets Administrative Tribunal (the TMF) has emphasized that crypto asset trading platforms must comply with all applicable securities and derivatives regulations. Otherwise, in accordance with the TMF’s mission to protect the public and to preserve the public’s trust in financial markets, sanctions and administrative penalties might apply[1]. The AMF c. XT.com Exchange decision is especially relevant in that regard. In fact, it has already been referenced and relied on by the TMF in other matters since it was delivered in September 2023[2].

In that case, the Autorité des marchés financiers (the AMF) alleged that XT.com Exchange (XT.com), a foreign crypto asset trading platform accessible from Québec, did not comply with securities and derivatives regulations. XT.com offers the following services to the public: crypto assets contracts, non-fungible tokens (NFTs) contracts, products presented as futures contracts (USD-T Futures and Coin-M Futures), savings accounts and staking programs.

The AMF sought orders from the TMF prohibiting XT.com from continuing its operations on securities and derivatives, from engaging in securities and derivatives brokerage activities, from acting as investment fund manager, and from engaging in any activity pertaining to derivatives offering and trading. XT.com was not represented by counsel during the proceedings.

XT.com’s Services are Investment Contracts under the Securities Act

The TMF first concluded that XT.com’s crypto assets contracts, NFTs, savings accounts and staking programs are subject to the Québec Securities Act because they are investment contracts under its section 1. The TMF applied the criteria developed by the Supreme Court of Canada in Pacific Coast[3] and found that:

  1. Investors enter into a contract with XT.com when they create an investor account online and agree to the terms and conditions;
  2. Investors have an expectation of profit based on yield representations made by XT.com on its website;
  3. Investors must make a capital contribution in XT.com’s accounts and bear the investment risks, making XT.com a common enterprise;
  4. However, as the jurisprudence recognizes, investors making contributions through the internet do not have the requisite knowledge to contribute to the enterprise;
  5. Nor do the investors have the right to participate directly in decisions regarding the enterprise’s operations as they agree to rely entirely on the decisions XT.com makes; and
  6. The economic reality of this case demonstrates that XT.com offers investment opportunities that could generate profits.

Futures Contracts are Derivatives under the Derivatives Act

The TMF also concluded that XT.com’s USDT-M Futures and Coin-M Futures offered to the public are derivatives as defined by section 3 of the Derivatives Act. The TMF, referring to the Supreme Court of Canada’s criteria defined in MacDonald v. Canada[4], concluded that periodical USDT-M Futures and Coin-M Futures are over-the-counter futures contracts because:

  1. They involve two parties: one who buys and one who sells;
  2. They have for object asset purchase and asset sale at a future fixed date for a fixed price;
  3. They allows investors to take a long position or to short sell; and
  4. They can be traded with margins and leverage.

Contracts for Difference

The TMF also concluded that perpetual USDT-M Futures and Coin-M Futures offered by XT.com are contracts for difference. The TMF, considering decisions rendered by the Ontario Securities Commission, indicated that these contracts:

  1. Involve two parties: one who buys and one who sells;
  2. Create obligations and payment rights depending on the underlying interest’s value;
  3. Allow investors to speculate on the underlying interest’s price fluctuations;
  4. Regard an underlying that can notably be a stock, a merchandise, a currency or a cryptoasset;
  5. Involve investors who do not have to possess the underlying interest or to physically take delivery of it;
  6. Do not have any expiration date or any fixed volume;
  7. Allow investors to take a long position or to short sell;
  8. Continuously renew the investors’ positions, unless they intervene; and
  9. Can be traded with leverage.

Other Instruments the Value of which is Derived from an Underlying Interest

The TMF also concluded that futures contracts offered by XT.com are derivatives because (i) they are contracts and (ii) the amount an investor must vest in a future contract is calculated from the underlying interest’s price, which corresponds to the definition of derivatives per section 3 of the Derivatives Act.

Findings and Sanctions

The TMF concluded that XT.com breached section 11 of the Securities Act by making a distribution of crypto assets contracts, NFTs, savings accounts and staking programs without issuing a prospectus (or applying for an exemption under section 263 of the Securities Act).

The TMF also concluded that XT.com breached section 82 of the Derivatives Act by creating and marketing derivatives, USDT-M Futures and Coin-M Futures without having the required authorization from the AMF or being exempted under section 7 of the Derivatives Act.

The TMF also concluded that XT.com, not registered as a dealer with the AMF, had acted as such in breach of section 148 of the Securities Act and section 54 of the Derivatives Act.

The TMF imposed an administrative penalty of $2,000,000 and ordered XT.com to stop its operations on securities and derivatives, to stop engaging in securities and derivatives brokerage activities, to stop acting as an investment fund manager, and to stop engaging in any activities pertaining to derivatives offering and trading.

In this decision, the TMF clearly emphasized that securities and derivatives regulations apply to crypto asset trading platforms and that important administrative sanctions can be imposed if they are breached. Crypto asset trading platforms should therefore stay informed of the applicable securities and derivatives regulations, ensure that they remain compliant and obtain the required registrations or authorizations with the regulators.

The author wishes to thank Roxanda Mirzac, student-at-law, for her assistance in authoring this publication.

[1] See for example Autorité des marchés financiers c. Coinex Global Limited, 2023 QCTMF 75 and Autorité des marchés financiers c. Zypto Sp Zoo, 2024 QCTMF 8.

[2] See for example Autorité des marchés financiers c. Coinex Global Limited, 2023 QCTMF 75 and Autorité des marchés financiers c. Élan Future inc., 2023 QCTMF 93.

[3] Pacific Coast Coin Exchange v. Ontario Securities Commission, [1978] 2 S.C.R. 112.

[4] MacDonald v. Canada, [2020] 1 SCR 319.